The Effect of Dividend Policy on Future Financial Performance of Firms Listed at the Nairobi Securities Exchange

Abstract

What a company does with its profits is important in assessing a business's potential to create wealth in the future. Re-investing profits wisely results in increased profitability of the company in the long run, which to the shareholders is important. Retained earnings on the company‟s books are not just earning higher returns, it also adds to the total asset value of the company, and asset value of each share. The objective of the research was to establish the effect of dividend policy on future financial performance of firms listed at the NSE. This study adopted a co-relational research design. After the screening process, the sample size was 43 and their financial statements for the period 2009-2013 were studied. A regression model was determined to establish the relationship between measures of earning distribution and its effect on future earnings of the firm. These correlations indicate that current operating accruals, non-current operating accruals and retained cash flows represent significant sources of variation in retained earnings. The findings support the position that the positive relationship between current dividend payout and future earnings growth is based on the free cash flow theory. The results also support the conventional wisdom that primary earning components are useful for determining association with future primary earnings, whereas other components are not as useful. The research is limited to the sample of Kenyan listed firms. Therefore the finding of this study could only be generalized to firms similar to those that included in this research. In addition, sample size is small. Consequently, managers should be aware of the intermediating impact of future performance of a firm and the future profitability of the firm could only be enhanced by improving earnings distribution in the first place.